I’m a tax lawyer based in San Francisco (www.WoodLLP.com), but I handle tax matters everywhere. I enjoy untangling a tax mess from the past, disputing taxes with the government or planning taxes for the future. One of my specialties is advising about lawsuit payments. Whether you’re receiving or paying a legal settlement, you can probably improve your tax position. I write frequently about taxes, from expatriation to sales tax, from selling your company to restitution. I’ve written over 30 tax books, but my best seller is still Taxation of Damage Awards and Settlement Payments. Contact me at wood@WoodLLP.com.

Beware Global IRS Reach -- And Very Long Memory

Does the IRS forgive or forget? Rarely, and when it comes to offshore accounts, even more seldom. The IRS quest for offshore accounts—some call it a Jihad—is hardly new. Armed with John Doe Summonses and other aggressive tactics, the feds fired a shot heard round the world that ended up striking Swiss bank secrecy in the head.

In 2009, the feds brought UBS to its knees with a deferred prosecution agreement and $780M fine. To this day, it was an unprecedented feat, and the IRS and DOJ haven’t missed a beat since. With around 120 prosecutions and nearly 40,000 Americans stepping forward to pay taxes, penalties, and interest, the IRS has collected billions and isn’t done yet.

The IRS believes there are still many Americans who haven’t come clean. Even worse than American scofflaws are those who enable them, claim prosecutors. Did the feds forget about former UBS banker Raoul Weil, who was indicted back in 2008 for allegedly helping rich U.S. clients hide billions? Not hardly.

Mr. Weil was just arrested in Italy, courtesy of Interpol. The U.S. plans to extradite him. The indictment claims that between 2002 and 2007, Mr. Weil’s UBS unit helped 20,000 U.S. clients conceal approximately $20 billion in assets from the IRS.

The IRS has indicted and prosecuted other foreign bankers and advisers, sending a chill through advisers everywhere. The names and addresses prosecutors are getting from the accused are being added to the mountains of information collected from voluntary disclosures, whistleblowers and soon FATCA, the granddaddy of disclosure laws. FATCA is a pervasive U.S. law that makes foreign banks and financial institutions everywhere report on Americans. It is now unfurling to impact global banks and depositors in 2014.

In Switzerland, hundreds of banks are expected to partake in the new program to disclose undeclared American accounts and pay penalties. The 14 banks already under investigation are not eligible. See Signed Joint Statement and Program. Additional banks may go under, including Bank Frey which just announced it would close.

Some bankers will face personal exposure, and that can make them cooperate. Renzo Gadola, a UBS banker from 1995 to 2008, got five years’ probation after turning over names of fellow bankers enabling Americans. Another was Christos Bagios of Credit Suisse, formerly with UBS. Mr. Bagios was accused of helping U.S. clients hide as much as $500 million from the IRS while at UBS.

With all of this, is any offshore income, account or trust still secret? The only safe assumption is no. Already many countries–soon virtually all–will have broad disclosure policies. See Offshore Accounts: No Place to Hide? Count Switzerland, the Caymans, Jersey, France, Germany, Italy, Spain, the U.K., Guernsey, Gilbraltar and the British Virgin Islands, etc. Nearly 30 more nations are expected, including eventually such unlikely prospects as China. It has become a kind of global landslide.

Even law-abiding U.S. citizens abroad are worried. The State Department estimates there are 7.2 million U.S. citizens abroad. It is safe to assume that most have non-U.S. bank accounts. The fact that only 825,000 FBARs were filed for 2012 suggests that this group too is under-complying.

The world may never be the same. What is the biggest lesson of Mr. Weil’s 2013 arrest in Italy on a 2008 tax indictment? The long reach and long memory of the federal government, especially when it comes to offshore accounts. Plainly, it isn’t over yet.

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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Robert, as usual, you pointed out the long term implications of a news event. It’s worth playing this out from the viewpoint of the wealthy and politicians.

Wealthy individuals (aka Golden Goose) who feel they pay too much tax have three basic strategies that they can execute:

Option 1) “Play the Game Better”: This means using all the LEGAL methods of avoiding tax under the laws of the relevant taxing jurisdiction(s).

Option 2) “Leave the Game”: For most taxpayers, this involves becoming non-resident. For Americans this requires giving up their US citizenship or resident alien status. Generally it means bringing forward the payment of capital gains.

Option 3) “Cheat the Game”: In years past, it was cheap and easy to engage in tax evasion. The morally challenged who were considering this option, did not seriously consider that they would ever have to pay the penalty of discovery. However the penalties of executing Option 3, are now real and unattractive. I think in a few short years, we will look back and as a result of Joe Doe summons, whistleblowers, new disclosure and exchange of information treaties, wide-scale tax evasion using undisclosed non-compliant accounts/structures in tax secrecy jurisdictions will be a thing of the past.

The obvious impact of the Golden Geese no longer considering cheating the game, is that they will be focusing on the first two options. Initially, more Golden Geese will be taking advantage of legally available tax avoidance strategies. Obviously the government will respond by closing various currently legal opportunities. With cheating off the table and playing the game better having a decreasing value, the attention of the Golden Geese will focus on leaving. As they discover that the cost and difficulty of leaving the game is not really that high (now that they have seriously examined it), you will see an ever increasing number of wealthy taxpayers leaving their current tax system.

Since in most G9 countries the top 1% account for just over 1/3rd of all personal taxes collected, even a slight increase in the number of Golden Geese who leave the tax system will have a dramatic impact on future tax revenues. The real question will be how will various governments legislatively respond to all of this.

There will be naive efforts to try and lobby for a global “level tax playing field”. This effort is doomed from the outset, because of the “Prisoner’s Dilemma”. Even efforts to try to impose standards for government fiscal policies across the eurozone weren’t possible. Try making a broader effort over a vastly increased number of independent countries, all of whole are trying to keep and attract Golden Geese to their shores, is hopeless.

Therefore the real action will take place domestically as governments examine their options. If they decide to increase the cost of leaving (the American approach), they will see the same result the US experienced. Specifically, RECORD numbers of Golden Geese leaving, before the cost gets even higher. If a government were smart, they would rather bring in policies that would attract more Golden Geese to their tax system. This means making if more attractive than the system that they are currently considering leaving. Just as a small number of departing Golden Geese has an asymmetric negative impact on total tax revenues, the attraction of even a relatively small number of Golden Geese will have a disproportionate positive impact.

Previously governments could unilaterally implement policies such as a wealth tax, that continue to add to the tax burden to Golden Geese. If a Golden Goose reacted by cheating the game, they could prosecute them. If a Golden Goose reacted by trying to play the game better they could change the rules.

However, in a globalized world where Golden Geese can set up their personal and business lives in many jurisdictions other than that of their birth, governments will now see a reaction to their increased burdens on the Golden Geese that will immediately and dramatically cause a drop in total tax revenues.

A case in point is France. Hollande dramatically increased the tax burden on the wealthy, in some cases more than 100% (http://www.reuters.com/article…. While that resulted in a one year bump in taxes collected, it also resulted in the permanent departure of many French Golden Geese (http://metro.co.uk/2012/12/20/…. The obvious result is a HUGE drop in future tax revenues.

In conclusion, while proposals such as a “wealth tax”, and “raising income tax rates” or may appear to be seductively simple in increasing tax revenues or decreasing inequality, the actual adoption of such policies will most likely have the complete opposite effect!

Thank you for laying out the alternatives. As you and others have pointed out, this may impact your Golden Geese category more than anyone else, but it has a spillover effect for many, many others. Time will tell, but I suspect we are stuck with this for some time. And even expatriation data may not be perfect or timely. Increasingly (and understandably), people do not want to tell others what they are doing or why they are doing it.

The number of renunciations of U.S citizenship is in its infancy. I expect that another aspect of this will be a change in the way people think about “wealth”. Wealth will be defined in terms of “the things government cannot take away from you”.

I don’t disagree that the US tax system is way too complex and needs a complete overhaul. But in fairness, I don’t think that accounts for the Swiss banking industry or people’s desire to participate in it. I do still find it surprising that the U.S. was able to parlay its legal and economic power to completely change the face of foreign banking in Switzerland and elsewhere. That is an astounding change.

Thanks for continuing your focus on the area of offshore accounts. As you are well aware the largest number of people with so called offshore accounts is U.S. citizens abroad. Americans abroad are in general very apologetic for using bank accounts outside the U.S. Really, they do wish they didn’t have them.

But they have three problems.

1. They really do need bank accounts to live.

2. It is not convenient for them to use U.S. bank accounts to pay their bills.

3. Truth is that many Americans abroad are unable to open bank accounts in the U.S.

I am going to be brutally honest here. I am sick and tired of hearing the “local bank accounts” of U.S. citizens abroad characterized as “offshore”. They are only “offshore” from the perspective of an ignorant, dysfunctional Congress, that is is locked a mental “time warp” – probably in the 1950s. U.S. lawyers and accountants are complicit in this by NOT taking a loud position that the whole definition of “offshore” needs to be reconsidered. Think about it.

Of course the problem with excluding “bank accounts that are local to a U.S. person abroad”, from the definition of “offshore”, is that it diminishes IRS potential penalty revenue.

Question for you:

Do you really believe that a bank account at the Royal Bank of Canada in Canada in the name of a Canadian resident is “offshore”?

Okay, sorry for the venting. Now on to the main point of your article. You say:

“Even worse than American scofflaws are those who enable them, claim prosecutors.”

The U.S. is attempting to impose various forms of Voluntary disclosure on the world.

In the beginning we had OVDP for individuals.

Then we had OVDP for banks (which you reference in your article).

Then we had OVDP for countries. That’s what a FATCA IGA is. By entering into an IGA a country discloses (at their expense) the existence of U.S. persons in their country. (That’s why there are so few FATCA IGAs.)

We will soon have OVDP for financial planners and lawyers (if the IRS can break down UBS can’t it break down lawyer client privilege?) What will this mean for the future of your law practice?

So, where the IRS is going is as follows:

A massive voluntary disclosure program for the world. Basically everybody will be disclosing information about everybody else. Some will be rewarded as “Whistle blowers”)

The U.S. has taken the idea of the East German Stasi and upgraded it to take advantage of modern technology.

The obvious solution for LAW ABIDING U.S. citizens abroad is to renounce their U.S. citizenship. They really have no choice. They can’t afford the costs, hassles, threats of penalties and dependence on lawyers. What about U.S. citizens abroad who are NOT law abiding? Well, we will see.

Well, I agree that the implications for regular US citizens abroad are really unfortunate. As you suggest, the definitional aspects are not obvious. What is a “foreign” account when you are living in that foreign country?

To me, the biggest shame in the IRS program is the lack of a viable and broad-based program for expats. The Streamlined program is just too narrow. I actually think the OVDP works reasonably well, but it isn’t fair for everyone, especially for many U.S. persons abroad who might well qualify for something similar to (but broader based) than the Streamlined program.

Former IRS Commissioner Schulman made it an IRS policy imperative to bring in tax revenue from foreign hidden accounts. He testified before Congress about the hidden assets and income, and he bragged about the $5.5 billion in tax revenue generated from the IRS “amnesty program.” See http://www.forbes.com/sites/kellyphillipserb/2012/11/08/irs-commissioner-says-public-goodbye-after-election-2012/

Schulman made multiple public statements about the $5.5 billion he raised from the hidden foreign income and accounts. He was, in my opinion, careless about classifying owners of foreign accounts as fraudulently hiding income. To the contrary, there are relatively few prosecutions by the DOJ on that issue.

In his public statements, to my personal dismay, Schulman never distinguished between non-reporting of income from foreign accounts by negligence or ignorance of the law from willful and fraudulent hiding of income and assets.

That is the legacy Schulman has left behind and there is no current IRS leadership that is taking any new direction on any topic. The IRS is determined to make sure that income is not hidden in foreign accounts. It is the only visible ongoing examination priority of the IRS.

You make a good and important point. In describing the conduct of Mr. Shulman you use the words “careless”, “negligence” and “ignorance”.

You may be partially true, depending on when his conduct is evaluated

Let’s remember that there have been three OVDP/I programs.

2009 – OVDP 1 – It’s possible that in his zeal to catch “homeland tax cheats” he was “ignorant” of the fact that most offshore accounts were used by Americans abroad.

2011 – OVDI – It’s possible that (at least for the first part of the program) that in his continued excitement over 2009 that he was “negligent” or “careless” in not considering the existence of Americans abroad and the bank accounts used by them for their day-to-day lives.

2012 – OVDP – By January of 2012 it was very clear to ALL that Americans abroad were being destroyed by his programs. It is also clear that for Americans Abroad to enter OVDP would be to pay most of their accumulated wealth in fines, and professional fees. (Not so for Homelanders where it is likely that the cost to them would be a smaller percentage of their assets.)

Yet he continued. There was nothing in the FAQs of OVDP 2012 that suggested that OVDP was NOT intended for and NOT suitable for Americans Abroad. Yet, he knew (or certainly ought to have known) that OVDP was unfairly destroying the lives of Americans abroad. In fact he even offered those who were UNAWARE they were U.S. citizens the “deal” to pay ONLY 5% of their wealth to the IRS. Most Americans abroad who KNEW they were U.S. citizens had “reasonable cause arguments (a point you have repeatedly made). Obviously the fact of NOT knowing one was a U.S. citizen would be an even easier case for “reasonable cause”.

Put it another way:

Mr. Shulman pressured (using the lawyers who claimed most should enter OVDP) those who clearly had a “reasonable cause” defense to enter OVDP.

By 2012, it was impossible to say that Mr. Shulman was ignorant, careless or negligent. What is the right word to characterize Mr. Shulman’s treatment of Americans Abroad in the 2012 OVDP? What is the right characterization of Mr. Shulman’s behavior? How would the IRS characterize a course of action, deliberately entered into, with full knowledge of the consequences?

The result:

The IRS simply cannot function without trust. OVDP penalty abuse has destroyed that trust for at least a generation. The cost to the United States will far exceed the $5 billion that Mr. Shulman claims to have brought in.

The estimates of US citizens abroad, never mind “US Persons” including present and former green-card holders and even deportees with prior long US residence, are so vague and politicized as to be unhelpful for the analysis of tax noncompliance and revenue potential. Until 2011 the State Department used a working estimate of around 4 million; without explanation they are now proposing the number put forward by American Citizens Abroad, a Geneva-based organization, of over 6 million. The GAO and the Department of Commerce have opined that a census of US citizens abroad is impractical.

From published statistics we know there are 113.4 million valid US passports. From time to time the State Department has published statistics on numbers of passports applied for from abroad; it does not, however, publish the contents of F-77 reports prepared by embassies on the “Estimated Number of Potential Evacuees” (see 7 FAM 040). Numerous countries report the number of US citizens registered as aliens, but this would not include persons also holding the nationality of that country or, within the EU/EEA/Switzerland of a member state. Nor would it include those persons born abroad to one or two American citizens whose birth was never registered with the Department of State for whatever reason, including doubt as to the requisite prior U.S. residence of a parent.

To publish a scare article about the “Global Reach” and the “Very Long Memory” of the IRS is unhelpful. With only five overseas attachés and an obvious priority for collection cases that will yield revenue, the IRS is unlikely to pursue those with few or no ties to the USA nor any assets or heirs there, but who may have a claim to US nationality. Many such persons will not be caught by FATCA because their US connection is so tenuous. Others, who may have no unpaid tax but longstanding failure to declare foreign accounts and, worse, educational or disability trusts, pensions in a non-treaty country and PFIC issues might well be bankrupted by IRS claims. Assuming the abolition of the Lord Mansfield “Revenue Rule”, the cost of compliance for many is astronomical, even impossible.

If there are really 6 million Americans abroad and only a few hundred thousand tax returns filed from foreign addresses, then FATCA and threats of penalties and prosecution — even assuming that nonfiling is assimilated to tax evasion and, with OECD support tax evasion to extraditable common-law fraud and money laundering — are not going to lead to a solution. Are we to expect that the kind of grey-haired grannies that I talk to on this subject should really quake in fear and rush to renounce their citizenship? Are we to think that the IRS will arrogate to itself the State Department and Immigration Courts’ role of determining who are American citizens and US Persons?

I neither seek new clients nor prepare tax returns. But I do hear stories, and I see that American citizens abroad are being denied bank services and that some, nationals also of the country where they live, are demanding to be treated, as public international law provides, as solely the nationals of the country of dual nationality where they reside. I wonder how long it will be before countries, while willing to give up their banks to the USG, aren’t willing to have their grannies threatened by a foreign country. I suspect we will see some countries at least take up their grannies’ claims to be protected from cross-border bullying.

For all the understandable eagerness of tax lawyers to assist those in irregular status — presumably chiefly the US residents among them — to resolve their noncompliance, I detect few or none eager to provide pro bono advice to the expatriate poor.